The Sophisticated Innovator
The Innovation Value Chain
Rather than reﬂexively importing innovation best practices, managers should adopt a tailored, end-to-end approach to generating, converting, and diffusing ideas.
by Morten T. Hansen and Julian Birkinshaw
XECUTIVES IN LARGE COMPANIES often ask themselves, “Why aren’t we better at innovation?” After all, there is noshortage of sound advice on how to improve: Come up with better ideas. Look outside the company for concepts and partners. Establish different funding mechanisms. Protect the new and radically different businesses from the old. Sharpen the execution. Such strategic counsel, however, is based on the assumption that all organizations face the same obstacles to developing new products, services, orlines of business. In reality, innovation challenges differ from ﬁrm to ﬁrm, and otherwise commonly followed advice can be wasteful, even harmful, if applied to the wrong situations.
Harvard Business Review 121
The Sophisticated Innovator
Consider how two different CEOs confronted the innovation challenges facing their companies. When Steve Bennettjoined Intuit, the maker of the ﬁnancial software programs Quicken and QuickBooks, in January 2000, it was a company with lots of ideas – most collected from outside the organization – but little discipline for bringing those ideas to market. “We had a lot of energy focused on learning from customers,” the CEO recalls, “but we were struggling to decide which ideas would have the highest impact.” To ﬁxthis, Bennett demanded that clear business objectives be set for ideas in development, and he held people accountable for delivering on them. Intuit is now just as good at executing on ideas as it is at generating them. The company’s
Article at a Glance There is no universal solution for organizations wanting to improve their ability to generate, develop, and disseminate new ideas. Every ﬁrmfaces its own challenges in this regard. Managers need to take an end-to-end view of their innovation efforts, pinpoint their particular weaknesses, and tailor innovation best practices as appropriate to address the deﬁciencies. The “innovation value chain” offers a comprehensive framework for doing just that. It breaks innovation down into three phases (idea generation, conversion, and diffusion) andsix critical activities (internal, cross-unit, and external sourcing; idea selection and development; and spread of the idea) performed across those phases. Using the innovation value chain, managers can identify the company’s weaknesses and, as a result, be more selective about which innovation tools and approaches to implement. The chain can also help managers realize that focusing too manyresources on perceived innovation strengths can further debilitate the weakest parts of the chain – and the company’s overall innovation capabilities.
revenues and proﬁts are up 47% and 65%, respectively, from three years ago, in part because of this effort. About the same time that Bennett took the helm at Intuit, A.G. Laﬂey became CEO of Procter & Gamble, a company that had traditionally beengood mainly at developing new products internally and bringing them to market. But a persistent weakness was its insular culture. Laﬂey wanted the company to become better at cultivating ideas from the outside. After ﬁve years of investments, P&G now has a state-of-the-art process for sourcing ideas externally, which includes a global network of resources and online knowledge-exchange sites. Thisprocess complements P&G’s core competency in executing on ideas and has helped fuel an increase in sales and proﬁts of 42% and 84%, respectively, over the past ﬁve years. Bennett and Laﬂey faced different innovation challenges, which required different solutions. Intuit and Procter & Gamble probably would be worse off today had their CEOs simply imported the latest best practices in innovation...
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